All California Agreements Must be in Writing by 2013

As we have reported, in a few short months (by January 1, 2013), California Labor Code section 2751 will require all businesses to ensure employee commission agreements are in writing. See, “Employee Sales Commissions: California Requires Written Agreements by End of 2012.”

While it is a good idea to have all compensation agreements in writing, the new law will not actually require other production-based pay plans to be written, for example bonuses or piece work.

In California, a commission is “compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionately upon the amount or value thereof.” Labor Code section 204.1 (emphasis added). As a commission is by definition linked to the sale of something, monies paid an employee in California for the making of so many units of product or for the provision of a one or another volume of a company’s services are not technically commissions (and thus, technically, will not have to be in writing by 2013).

The potential variations on commission compensation rules are of course vast. Whether writing a commission agreement for the first time or reviewing existing written arrangements for soundness, some essentials are:

• Define when and how a commission is earned (for example, when a sales agreement is reached, when the customer actually makes payment, etc.);
• Specify the formula used to calculate a commission for a particular sale or the volume of sales;
• Cover the procedure for resolving any commission to be split between two or more employees;
• Explain the timing of commission payments as required by state law;
• Reference the deductions from gross commission amounts as required by federal and state law;
• Describe the rules for any advance draw and reconciliation arrangements;
• Clearly spell out clearly that the company will pay upon termination only those commissions actually earned on or before that date; and
• Specify the rules for determination and payment of commissions an employee could yet earn after his or her termination date (for example, commissions earned only after the customer has paid on the sale). See, “Commissions for Terminated Employees, Clearly Written Agreements are the “Ounce” of Prevention”

An experienced employment law attorney can help a business prevent or limit disputes created by vague, ambiguous or non-existent sales commission agreements.

Related Article:
Is Your Commissioned Inside Sales Representative Exempt From Overtime?